The calm in the markets has been unnerving.
You might think the world has been enjoying a season so tranquil that the stock, bond and currency markets have fallen asleep.
Yet the world has been anything but peaceful lately, whether in the United States, Ukraine or the Persian Gulf. And the Federal Reserve gave the markets another reason for concern on Wednesday when it held interest rates steady. Jerome H. Powell, the Fed chair, said that the economy faced the risks of both higher inflation and stagnating economic growth, but that the central bank needed more evidence before it could decide where the greatest dangers lay.
“Right now, it’s a forecast in a foggy time,” he said. Even more than usual, the path ahead isn’t clear. Still, there was barely any reaction in market prices. Nor has anything else seriously disrupted major markets.
That’s noteworthy, when you consider the crises that are looming: the highest tariffs in decades; a contentious crackdown on immigration and a swelling budget deficit in the United States; and, in the Middle East, an escalating war between Israel and Iran that could sharply reduce global oil supplies.
This isn’t to say all markets have been entirely placid. The price of oil has oscillated since Israel launched a barrage of air attacks on Iran last Friday, setting off a new, heightened stage of conflict between the two longtime adversaries. President Trump has warned Iran’s supreme leader, Ayatollah Ali Khamenei, that the United States might intervene directly, saying, “Our patience is wearing thin.” The start of a much bigger war, with the United States joining the Israeli effort to eliminate Iran as a potential nuclear threat, would undoubtedly wake the markets from their apparent slumber.
High Stakes
The economic risks in the Persian Gulf are enormous. If Iran were desperate enough, in addition to targeting U.S. forces in the region it could throttle the oil supplies that pass through the Strait of Hormuz. Shipping through the strait encompasses one quarter of “total global seaborne oil trade,” according to the U.S. Energy Information Administration, and protecting that oil route has been a preoccupation of U.S. military planners since the days of the shah of Iran, who was deposed in 1979.
But given the gravity of the situation and the soaring oil prices associated with the onset of previous wars in petroleum-rich regions, both in the gulf and at the start of Russia’s war with Ukraine, the prospect of a disruption of world oil supplies now has hardly registered beyond the narrow energy markets.
Yet even the oil market hasn’t moved all that much, considering what’s at stake. The futures price of benchmark Brent crude on Wednesday was still below $80 a barrel — less than where it stood in January or one year ago.
There are rational explanations for the oil market’s restraint. Before Israel’s attack on Iran, global oil supplies were ample and demand for oil was constrained by the rising tariffs. The eight members of the OPEC Plus oil cartel, guided by Saudi Arabia, have been ramping up production. And global economic growth has been slowing, amid predictions of a sharper deceleration later this year, when the tariff war started by the United States is expected to really bite.
Deutsche Bank projected this past week that if the conflict in the gulf led to the closing of the Strait of Hormuz or to severe damage to regional infrastructure, oil prices could easily surge to $120 a barrel or more. That occurred in the early stages of Russia’s war on Ukraine and in previous Persian Gulf wars. A global recession could follow.
Amoral Markets
The markets are fundamentally amoral and apolitical, as I’ve noted before. They are remarkably indifferent to pandemics, elections, civil unrest and just about everything else that may be extraneous to the central purpose of making profits. And corporate profits remain strong, despite everything.
So I’ve not been surprised by the resilience of the markets in the face of the military and political spectacles this spring and summer.
It has been impossible to watch the news in the United States without seeing displays of military and law enforcement power — airborne pyrotechnics in the Middle East, parading tanks and soldiers in Washington, and vistas of National Guard troops, Marines, police officers and immigration agents in Los Angeles confronting thousands of mainly peaceful demonstrators.
There have been a political assassination in Minnesota and arrests across the country of government officials protesting the president’s immigration agenda, along with evidence of political polarization so acute that it is affecting people’s views on a broad array of topics.
Whether you are feeling upbeat about the U.S. stock market at this moment may depend, at least in part, on your political alignment. Gallup reported in April that 58 percent of Republicans expected the stock market to rise, compared with only 21 percent of independents and 12 percent of Democrats.
Difficult as it may be, there’s considerable evidence that investors will be better off if they can transcend this kind of thinking. As I pointed out in November using data from Bespoke Investment Group, an independent research firm, if you had invested $1,000 in the S&P 500 from early 1953 through March 2024, and stayed in the index only during Republican administrations, it would have grown to $27,400. If you had kept the money in stocks when Democrats were in power, your stash would have reached $61,800. But if you had invested in the stock market through all administrations, Republican and Democratic alike, that $1,000 would have reached $1.69 million.
There’s no doubt, however, that major wars and big shifts in economic policies can have important effects. The Middle East may be grabbing your attention, but don’t forget, from a markets perspective, that two significant Trump administration policy initiatives are likely to re-emerge as flash points. In addition to the rising tariffs, the president’s fiscal program will increase the country’s enormous debt burden, testing the bond market’s willingness to absorb the load.
Both of these issues caused flare-ups this spring. One occurred when Mr. Trump made his so-called Liberation Day tariffs announcement on April 2. As things stand, the nonpartisan Budget Lab at Yale estimates that “consumers face an overall average effective tariff rate of 15.8 percent, the highest since 1936.” Tariffs may rise higher than these already steep rates.
Furthermore, the nonpartisan Congressional Budget Office projects that the House version of the legislation favored by Mr. Trump to cut taxes and slash federal safety-net programs would add about $3.4 trillion to the national debt. The Senate is working on its own version.
Bond traders are already hedging their bets. The price of insuring against a possible U.S. debt default is mounting. The entire bond market may rise up in displeasure once again.
I’m expecting rough patches ahead, afflicting a variety of financial markets. Though I’m worried, I remain persistently bullish for the long run. Investors have done well by ignoring crises — and by being prepared to withstand disruptions and losses that sometimes last for years.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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